Use Giffen goods to exploit the poor in your dystopian society

Illustration for article titled Use Giffen goods to exploit the poor in your dystopian society

So you've taken over the world. Good for you! But how are you going to make the most of your newfound kingdom? By wringing all the money you can out of the oppressed poor using Giffen goods.

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Welcome! First of all, let me salute you in your newfound status as supreme overlord of Earth. And let me say, that as a popular internet personality (by some standards), I can really help you out in controlling your society of defeated, joyless drones. In fact, let me give you a hand right away. You're probably thinking that, in order to run a basic economy, you're going to keep a low price on subsistence goods, allowing the poor to feed themselves, and then allow them occasional treats to keep them working.

Perhaps you're not even concerned with economics, but want to keep an eye on those blackmarket economies that have sprung up around the ruined cities of the world. You notice that some things have low prices, while others have higher ones. And people tend to buy more of the low-priced stuff and less of the high-priced stuff.

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Not necessarily! All the way back in the 1800s, which is a time you can read about if you pull a few books out of the smoking remains of our libraries, there was a man named Robert Giffen. He noticed an interesting thing. Poor people tended to buy a lot of bread, since it was the cheapest good.

But when bread prices went up none of the poor stopped buying bread. In fact, they bought even more. They didn't do this out of a need to be seen with high-priced goods - it wasn't a designer label thing. During periods of low bread prices, they bought enough bread to allow it to be a staple of their diet, and then bought a few more expensive goods, like meat and cheese, to supplement their diet. As the price of bread went up, they had to cut back on the more expensive items, like meat. But meat was so much more expensive than bread that, with the income freed up from buying meat, they could now buy a lot more bread. Pushing up the price on certain goods made people buy more of them, not less.

These goods are called Giffen goods. They share a few characteristics. First, they have to be the kind of thing that nobody bothers buying when the prices go up. These are bottom-of-the-barrel goods - called inferior goods. On the other hand, there can't be a replacement for these goods. The public has to rely on them, not like them. Finally, they have to be a good bit of each person's income, but not enough that people can't afford other things. In other words, give them hope that they can get more than the bare minimum out of life. Then, whenever you need a little extra cash, push up the price on the Giffen good and take that hope away.

Anyway, that's my advice on managing your dystopia. If you don't like it, don't worry. I'm gonna be over here in a corner working out a way to explode things that I think is really going to tickle you. Just give me a second. Hey, what's with the big glowy thing? NNNNNNnnnnnno-

Via Inferior Goods, Giffen Goods, and Shochu.

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DISCUSSION

This is a mischaracterization of the reason Giffen goods (may) exist and the motives behind their use by consumers. First take note that when you discuss consumption vs price you aren't talking about a single consumer or single family but a trend within a market. Individual behavior will vary but the consumption curve represents the aggregate of many consumer decisions.

Classically, Giffen goods are low cost necessities to low income consumers that have few substitutes at that price and that are in and of themselves largely necessary in maintaining day to day life. The potato is actually a better example as bread doesn't sustain the consumer in and of itself. The actual characterization of what makes a Giffen good a Giffen good is the consumption curve that starts low with low income, increases with increasing income and decreases with income rising above a certain level. The reason this behavior exists has nothing to do with consumer demand or forecasting what a higher income might be like it. It centers on two things: the income of the consumer and the value of the good e.g. without the good, the consumer cannot live.

The reason you have a small bell curve at the low end of the income spectrum is the good is the first thing a person purchases. Like food. As income increases the consumer buys more of this item - up to a point. As income increases further, the consumption reaches a maximum and then trails off. Above a certain income level, none of the item is purchased because better versions of the good are now available at that higher level. So far so good.

But when you look at price, something odd happens, as price increases, people spend more of their income on this item (it is incorrect to simply say that they buy more of this item because a price increase typically means there is less of the actual item available in the market - in this case increased consumption is a measure of spending and not units consumed). Again, think food or more specifically potatoes. As the price increases, more and more of your income will go toward potatoes because without substitutes, you will starve. So consumption (verses quantity) of this one item in the market increases as price increases over consumption of other market goods. This was the apparent Paradox Giffen was studying. Above a certain price point, however, consumption does eventually decreases (we are talking a population and not one guy here - remember) as the Giffen good is priced out of the market. It eventually trails off to zero consumption at a sufficiently increased price.

There is an odd case where unit consumption increases as price increases - this has do do with the few items the consumer can purchase at a low income. As the Giffen Good gets more expensive, the money left over cannot buy other items but can buy another unit of the Giffen Good so it does. Remember that a Giffen item is cheap so it represents the best value of the remaining consumer budget - theoretically.

The kicker is that Giffen's findings were and remain somewhat controversial. No one has ever been able to isolate an actual Giffen Good. the potato in Ireland especially (they had scarcity issues you may recall) was the closest front runner for the title. The fact remains that Giffen presumed a great deal about his consumer he could not prove and he was trying to express a mode of behavior that was arguably erratic.

Bottom line, Giffen Goods almost certainly exist only in small markets with few competing goods and few opportunities for the consumer to shift or increase economic resources so the Hunger Games has that going for it.